Capacity building at board level in the financial sector should be top priority

Given the governance issues in the NBFIs the regulator’s initiative to assist Commercial Banks and NBFIs to achieve the highest standards of personal and organizational performance by conducting regular Bank Directors symposiums to educate bank directors in the past was one of those “best practices” for corporate governance and is a great initiative to prepare Commercial Banks for the long term and also to build a pipeline of directors with the right skills and competencies to strengthen the Bank’s resilience to meet current and future challenges and to help Banks to play its role as the national economic enabler. 

The Central Bank being proactive without being reactive in the area of director education is good for the banking system in general and also good for the development of capacity within banks. In addition, would certainly be looked upon favorably by all the stakeholders (depositors and shareholders) of the commercial banks, given the fact the three pillars of a resilient banking system is profitability, capital and liquidity buffers and good governance.

 Governance
Today Bank’s occupy a special position of trust in the national economy. It is emphasized that they have broader responsibilities that go beyond their shareholders and employees by virtue of the role they play as managers of public deposits. If the responsibilities are to be effectively discharged, it is important that persons of the right calibre are appointed to boards and updated. 

While integrity is an essential pre-requisite, this alone is not sufficient and directors must be people who are alert and have the capacity to understand the inherent risks taken on by an institution and objectively analyze the proposals submitted by management on various aspects of a firm’s operations. 

Therefore, essential qualities of independent directors are curiosity, courage, persistence, have a good knowledge of the business, aware of the risks taken by the entity, able to manage the dynamics with the executive and demonstrate emotional intelligence to address issues constructively. However, it is equally important that a board has competence within it, which embraces other disciplines such as Law, Economics, marketing, Human Resource Management and Technology, so that a multidisciplinary approach is taken to managing risks, to challenge the strategy constructively to grow the business and also to make succession changeovers less distressing for the organization.

 Building capacity at board level
Therefore given the complexity and the responsibility of the Director’s job, the challenge for a director to continually stay abreast of developments in the financial markets is today a challenge, moreover there is a need for bigger and better banks to propel Sri Lanka towards the 10 trillion-asset target by 2016. 

Therefore the financial sector needs to ramp up the skills pipeline as well have directors that understand the complexity of a financial institution. Therefore a properly designed director education policy with CPD would help to build capacity within the banking sector. 

The structure however of a director education policy needs to be carefully crafted but does not have to be long, but it should address at least the following issues: Firstly, director education must either be mandated, required, recommended or encouraged? Will the directors be evaluated after the course or do they obtain the requisite director education annually? What type of education qualifies as director education? At a minimum, a Core Course Curriculum should cover the following topics: Corporate Governance/Fiduciary Duties- What are a bank director’s responsibilities? How should the Board of Directors govern itself to help it do the job it is required to do, and what are the keys to independence? Essential Board reports, financial statements, bank performance reports, and reports of examination-What are they and how to read and understand them. Red Flags, what are they, how to become aware of them, and what to do about them?

Understanding external audit, internal audit, internal controls, and the role of the Audit 
Committee. The role of the Board and Credit committees. Asset/Liability management and bank investments Risk Management Principles -- What do the bank regulators expect, and what does the Board need to do? The Board’s role in strategic planning? The use of third party suppliers and contractors?  The evaluation of the CEO and the Board and the selection and nomination of new Directors.  CEO compensation and Board oversight responsibilities. Finally, Basic bank legal, regulatory rules and disclosures that all bank directors need to know and steps to minimize potential personal liability. 
(The writer was a bank director from 2003-2014)